TaxTMI 
TaxTMI 
Master Circular - Guarantees and Co-acceptances
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.... Internal Control Systems 2.2.6 Guarantees on behalf of Banks' Directors 2.2.7 Bank Guarantee Scheme of Government of India 2.2.8 Guarantees on Behalf of Share and Stock Brokers/ Commodity Brokers 2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns 2.2.10 Guarantees of State Government 2.3 Other Stipulations - Issuing Bid Bonds and Performance Guarantees for export 2.3.1 Unconditional Guarantees in favour of Overseas Employers/ Importers on behalf of Indian Exporters 2.3.2 Certain Precautions in case of Project Exports 2.3.3 Guarantees for Export Advance 2.3.4 Review of Banks' Procedures 2.3.5 Overseas Investments - Guarantee on behalf of Wholly Owned Subsidiary (WOS) and Joint Venture (JV) abroad 2.4 Restrictions on guarantees for placement of funds with NBFCs or other non-bank entities 2.5 Payment of invoked guarantees 2.6 Co-acceptance of bills 2.6.1 General 2.6.2 Safeguards 2.7 Precautions to be taken in the case of Letters of Credit 2.8 Compliance to the regulations....
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....e approval of their Board of Directors. 2.1.4 Banks should, in general, refrain from issuing non-fund based facilities to/on behalf of constituents who do not enjoy credit facilities with them. However, banks are permitted to grant non-fund based facilities, including partial credit enhancement^1, to those customers, who do not avail any fund based facility from any bank in India. Provision of such facilities shall be in terms of a comprehensive Board approved policy for grant of non-fund based facility to such borrowers. The banks shall ensure that the borrower has not availed any fund based facility from any bank operating in India. However, at the time of granting non-fund based facilities, banks shall obtain declaration from the customer about the non- fund based credit facilities already enjoyed by them from other banks. Banks shall undertake the same level of credit appraisal as has been laid down for fund based facilities. The instructions related to KYC / AML / CFT, submission of credit information to Credit Information Companies and other prudential norms applicable to banks, including exposure norms, issued by RBI from time to time, shall be adhered to in respect of al....
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....rantees (including State government guarantees), letter of comfort, etc. 2.2.1.2 For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Banks, may however, treat annuities under build-operate -transfer (BOT) model in respect of road/highway projects and toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities, subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable. 2.2.1.3 All exemptions allowed for computation of unsecured advances stand withdrawn. 2.2.2 Precautions for issuing guarantees Banks should adopt the following precautions while issuing guarantees on behalf of their customers. (i) As a rule, banks should avoid giving unsecured guarantees in large amounts and for medium and long-term periods. They should avoid undue concentration of such....
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....ower cut-off point, depending upon the size and category of branches, may be prescribed by banks, where considered necessary. Such a system will reduce the scope for malpractices/ losses arising from the wrong perception/ judgement or lack of honesty/ integrity on the part of a single signatory. Banks should evolve suitable systems and procedures, keeping in view the spirit of these instructions and allow deviation from the two signatures discipline only in exceptional circumstances. The responsibility for ensuring the adequacy and effectiveness of the systems and procedures for preventing perpetration of frauds and malpractices by their officials would, in such cases, rest on the top managements of the banks. In case, exceptions are made for affixing of only one signature on the instruments, banks should devise a system for subjecting such instruments to special scrutiny by the auditors or inspectors at the time of internal inspection of branches. 2.2.6 Guarantees on behalf of Banks' Directors 2.2.6.1 Section 20 of the Banking Regulation Act, 1949 prohibits banks from granting loans or advances to any of their directors or any firm or company in which any of their direct....
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.... considered necessary are not one-sided and are made in agreement with the guaranteeing bank. Banks should mention in the guarantee bonds and their correspondence with the various State Governments, the names of the beneficiary departments and the purposes for which the guarantees are executed. This is necessary to facilitate prompt identification of the guarantees with the concerned departments. In regard to the guarantees furnished by the banks in favour of Government Departments in the name of the President of India, any correspondence thereon should be exchanged with the concerned ministries/ departments and not with the President of India. 2.2.8 Guarantees on behalf of Share and Stock Brokers/ Commodity Brokers Banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by stock exchanges. Banks may also issue guarantees in lieu of margin requirements as per stock exchange regulations. Banks have been advised that they should obtain a minimum margin of 50 percent while issuing such guarantees. A minimum cash margin of 25 per cent (within ....
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....ted companies, when the lending institutions are satisfied about the management, its stake in the concern, economic viability of the proposal and the financial position and capacity for cash generation, no personal guarantee need be insisted upon. In fact, in the case of widely owned public limited companies, which may be rated as first class and satisfying the above conditions, guarantees may not be necessary even if the advances are unsecured. Also, in the case of companies, whether private or public, which are under professional management, guarantees may not be insisted upon from persons who are connected with the management solely by virtue of their professional/technical qualifications and not consequent upon any significant shareholding in the company concerned. (ii) Where the lending institutions are not so convinced about the aspects of loan proposals mentioned above, they should seek to stipulate conditions to make the proposals acceptable without such guarantees. In some cases, more stringent forms of financial discipline like restrictions on distribution of dividends, further expansion, aggregate borrowings, creation of further charge on assets and stipulation of mai....
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.... companies, whose financial position and/or capacity for cash generation is not satisfactory even though the relevant advances are secured. In such cases, personal guarantees are useful. (v) Cases where there is likely to be considerable delay in the creation of a charge on assets, guarantee may be taken, where deemed necessary, to cover the interim period between the disbursement of loan and the creation of the charge on assets. (vi) Personal guarantees are relevant where the balance sheet or financial statement of a company discloses interlocking of funds between the company and other concerns owned or managed by a group. C. Worth of the guarantors, payment of guarantee commission, etc Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by t....
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....tions - Issuing bid bonds and performance guarantees for export With a view to boost exports, banks should adopt a flexible approach in the matter of obtaining cover and earmarking of assets/ credit limits, drawing power, while issuing bid bonds and performance guarantees for export purposes. Banks may, however, safeguard their interests by obtaining coverage from Export Credit Guarantee Corporation of India Ltd. (ECGC), wherever considered necessary. Banks may consider sanctioning separate limits for issue of bid bonds. Within the limits so sanctioned, bid bonds against individual contracts may be issued, subject to usual considerations. 2.3.1 Unconditional Guarantees in favour of Overseas Employers/Importers on behalf of Indian Exporters 2.3.1.1 While agreeing to give unconditional guarantee in favour of overseas employers/importers on behalf of Indian Exporters, banks should obtain an undertaking from the exporter to the effect that when the guarantee is invoked, the bank would be entitled to make payment, notwithstanding any dispute between the exporter and the importer. Although, such an undertaking may not prevent the exporter from approaching the Court for an injunc....
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....ended to facilitate execution of export contracts by an exporter and not for other purposes. In terms of extant instructions banks have also been advised that guarantees contain inherent risks, and that it would not be in the banks' interest or in the public interest generally to encourage parties to over-extend their commitments and embark upon enterprises solely relying on the easy availability of guarantee facilities. Banks should, therefore, be careful while extending guarantees against export advances so as to ensure that no violation of FEMA regulations takes place and banks are not exposed to various risks the export advances received by the exporters are in compliance with the regulations/ directions issued under the Foreign Exchange Management Act, 1999. It will be important for the banks to carry out due diligence and verify the track record of such exporters to assess their ability to execute such export orders. 2.3.3.2 Further, banks should also ensure that the export advances received by the exporters are in compliance with the regulations/ directions issued under the Foreign Exchange Management Act, 1999. 2.3.3.3 It is reiterated that export performance guar....
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....ness. Further while extending fund / non-fund based credit facilities to overseas JV / WOS / WoSDS of Indian companies in connection with their business, either through branches in India or through branches / subsidiaries abroad, banks should ensure effective monitoring of the end use of such facilities and its conformity with the business needs of such entities. Banks may also ensure compliance with A.P. (DIR Series) Circular No. 20 dated March 13, 2018 regarding 'Discontinuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits'. 2.4 Restrictions on guarantees for placement of funds with NBFCs or other non-bank entities 2.4.1 Banks should not execute guarantees for enabling placement of funds with NBFCs or other non-banking entities directly or indirectly, including inter-company deposits/ loans. This stipulation will apply to all sources of funds raised by such entities, e.g. deposits/ loans received from trusts and other institutions. 2.4.2 Transactions of the following types are in the nature of guarantees executed by banks in respect of funds made available by one non-banking entity to another non-banking entity and banks should therefor....
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....ible debentures issued by such entities. It is clarified that the extant instructions apply only to loans and not to bonds or debt instruments. Guarantees by the banking system for a corporate bond or any debt instrument not only have significant systemic implications but also impede the development of a genuine corporate debt market. Banks are advised to strictly comply with the extant regulations and in particular, not to provide guarantees for issuance of bonds or debt instruments of any kind. However, banks are permitted to provide partial credit enhancement (PCE) to bonds issued by corporates /special purpose vehicles (SPVs), NBFC-ND-SIs and Housing Finance Companies (HFCs) subject to conditions stipulated in circular DBR.BP.BC.No.40/21.04.142/2015-16 dated September 24, 2015 on Partial Credit Enhancement to Corporate Bonds and other associated circulars issued subsequently on the subject. The PCE shall be provided only in the form of a non-funded irrevocable contingent line of credit. 2.4.3.2 Lending banks Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance with the following conditions: (i) The exposure ....
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....ssue guarantees in favour of various Development Agencies/Boards, like Indian Renewable Energy Development Agency, National Horticulture Board, etc. for obtaining soft loans and/or other forms of development assistance from such Agencies/Boards with the objective of improving efficiency, productivity, etc., subject to the following conditions: • Banks should satisfy themselves, on the basis of credit appraisal, regarding the technical feasibility, financial viability and bankability of individual projects and/or loan proposals i.e. the standard of such appraisal should be the same, as is done in the case of a loan proposal seeking sanction of term finance/loan. • Banks should conform to the prudential exposure norms prescribed from time to time for an individual borrower/group of borrowers. • Banks should suitably secure themselves before extending such guarantees. 2.4.5 Infrastructure projects Keeping in view the special features of lending to infrastructure projects viz., the high degree of appraisal skills on the part of lenders and availability of resources of a maturity matching with the project period, banks have been given discret....
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....he commitment of guarantees when invoked. It has been observed that a bank guarantee is a contract between the beneficiary and the bank. When the beneficiary invokes the bank guarantee and a letter invoking the same is sent in terms of the bank guarantee, it is obligatory on the bank to make payment to the beneficiary. 2.5.6 The Supreme Court had observed [U.P. Co-operative Federation Private Ltd. versus Singh Consultants and Engineers Private Ltd. (1988 IC SSC 174)] that the commitments of the banks must be honoured, free from interference by the courts. The relevant extract from the judgement of the Supreme Court in a case is as under: 'We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is, to say, in case of fraud or any case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere'. 2.5.7 In order to avoid such situations, it is absolutely essential for banks to appraise the proposals for guarantees with the same diligence, as in the case of fund based limits, and o....
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....on of certified copy of the judgement, as the judgement/ order is pronounced in open Court in presence of the parties/ their counsels and the judgement is known to the bank and a copy of the judgement is available on websites of the Courts. (ii) In case the bank is not a party to the proceedings, a signed copy of the minutes of the order certified by the Registrar/ Deputy or Assistant Registrar of the High Court or the ordinary copy of the judgement/ order of the High Court, duly attested to be true copy by Government Counsel, should be sufficient for honouring the obligation under guarantee, unless the guarantor bank decides to file any appeal against the order of the High Court. (iii) Banks should honour the guarantees issued by them as and when they are invoked in accordance with the terms and conditions of the guarantee deeds. In case of any disputes, such honouring can be done under protest, if necessary, and the matters of dispute pursued separately. (iv) The Government, on their part, have advised the various Government departments, etc. that the invocation of guarantees should be done after careful consideration at a senior-level that a default has occurred in acco....
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....r co-acceptance to house bills/ accommodation bills drawn by group concerns on one another. (v) The banks discounting such bills, co-accepted by other banks, should also ensure that the bills are not accommodation bills and that the co-accepting bank has the capacity to redeem the obligation in case of need. (vi) Bank-wise limits should be fixed, taking into consideration the size of each bank for discounting bills co-accepted by other banks, and the relative powers of the officials of the other banks should be got registered with the discounting banks. (vii) Care should be taken to see that the co-acceptance liability of any bank is not disproportionate to its known resources position. (viii) A system of obtaining periodical confirmation of the liability of co-accepting banks in regard to the outstanding bills should be introduced. (ix) Proper records of the bills co-accepted for each customer should be maintained, so that the commitments for each customer and the total commitments at a branch can be readily ascertained, and these should be scrutinised by Internal Inspectors and commented upon in their reports. (x) It is also desirable for the discounting bank to....
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....owers. 2.6.2.3 There have been instances where branches of banks open L/Cs on behalf of their constituents and also co-accept the bills drawn under such L/Cs. Legally, if a bank co-accepts a bill drawn under its own L/C, the bill so co-accepted becomes an independent document. The special rules applicable to commercial credits do not apply to such a bill and the bill is exclusively governed by the law relating to Bills of Exchange, i.e. the Negotiable Instruments Act. The negotiating bank of such a bill is not under any obligation to check the particulars of the bill with reference to the terms of the L/C. This practice is, therefore, superfluous and defeats the purpose of issuing the L/C. The discounting banks should first ascertain from the co-accepting banks, the reason for such co-acceptance of bills drawn under their own L/C and only after satisfying themselves of genuineness of such transactions, they may consider discounting such bills. 2.6.2.4 It should be ensured that the branch officials strictly adhere to the above referred instructions at the time of co-acceptance of bills. It would be advisable to determine clear accountability in this respect and officials found....
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....ce- Refinancing of Exposures to Borrowers 4. DBOD.No.BP.BC.107/21.04.048/2013-14 22.04.2014 Fund / Non-Fund based Credit Facilities to Overseas Joint Ventures / Wholly Owned Subsidiaries / Wholly owned Step-down Subsidiaries of Indian Companies 5. DBOD.BP.BC.No.98/21.04.132/2013-14 26.02.2014 Framework for Revitalising Distressed Assets in the Economy - Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures 6. Mail-Box Clarification 19.05.2011 Issue of Bank Guarantee (BG) / Letter of Credit (LC) by Commercial Banks to constituents of Co-operative Banks 7. DBOD.BP.BC.96/08.12.014/2009-10 23.04.2010 Prudential Norms on Advances to Infrastructure Sector 8. DBOD.No.Dir.BC.136/13.03.00/2008-09 29.05.2009 Issue of Guarantees by Banks 9. DBOD.No.BP.BC.127/21.04.009/2008-09 22.04.2009 Extension of Guarantee - Maturity Beyond Ten Years 10. Mail-Box Clarification 15.04.2009 Bank Guarantee with Auto Renewal Clause 11. Mail-Box Clarification 27.05.2008 Signing of Bank Guarantee 12. DBOD.No.Dir.BC.72/13.03.00/2006-07 03.04.2007 Guarantees for Export Advance 13. DBOD....
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....DBOD.No.Dir.BC.35/C.96 (Z)-90 22.10.90 Bank Guarantee Scheme 34. IECD.No.PMD.BC.12/C.446 (C&P)-90/91 21.09.90 Co-acceptance/Issuance of Guarantee Favouring Financial Institutions - Buyers' Line of Credit Scheme (BLCS) 35. DBOD.No.Dir.BC.11/C.96-89 09.08.89 Bank Guarantee Scheme 36. DBOD.No.BP.BC.124/C.473-89 31.05.89 Payment under Bank Guarantees - Immediate Settlement of Cases 37. DBOD.No.Inf.BC.73/C.109(H)-89 15.02.89 Bank Guarantee Scheme 38. IECD.No.PMS.207/C.446 (C&P)-87/88 29.06.88 Advances on Consortium Basis - Co-ordination Between Banks and All-India Financial Institutions in Dealing with New Investment 39. IECD.No.EFD.197/822-WGM-MOD-88 30.01.88 Project Exports - Grant of Credit Facilities to Indian Contractors 40. DBOD.No.BP.BC.71/C.473-87 10.12.87 Payment under Bank Guarantees - Immediate Settlement of Cases 41. DBOD.No.BP.BC.11/C.473-87 10.02.87 Payment of Invoked Guarantees 42. DBOD.SIC.BC.5A/C.739 (A-1)-87 29.01.87 Co-acceptance of Bills Drawn under Letters of Credit by Banks 43. DBOD.No.BP.BC.130/C.473-86 15.11.86 Bank Guarantee 44. ....
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....BC.68/C.109-72 31.07.72 Bank Guarantee Scheme 68. DBOD.No.Sch.BC.27/C.96(S)-72 24.03.72 Continuance of Exemption in respect of Inland D/A Bills for the purpose of Norm relating to Unsecured Advances/Guarantees 69. DBOD.No.Sch.BC.1610/C.96(S)-70 23.10.70 Unsecured Advances and Guarantees 70. Nat 2002/c.473-70 29.7.70 Guidelines under which guarantees may or may not be considered 71. DBOD.No.Sch.BC.1051/C.96(S)-69 01.07.69 Unsecured Advances made to Exporters on Consignment Basis to be Excluded for the Purpose of Norm 72. DBOD.No.Sch.BC.1001/C.96Z-69 23.06.69 Bank Guarantees 73. DBOD.No.Sch.BC.2381/C.96(Z)-68 14.08.68 Bank Guarantees 74. DBOD.No.Sch.BC.2342/C.96S-68 08.08.68 Advances against Book Debts 75. DBOD.No.Sch.BC.481/C.96S-68 30.03.68 Unsecured Advances 76. DBOD.No.Sch.BC.421/C.96(S)-68 19.03.68 Unsecured Advances - Advances against Supply Bills Drawn on Central/State Governments 77. DBOD.No.Sch.BC.359/C.96S-68 07.03.68 Unsecured Advances - Inland D/A Bills having a Usance of 90 Days 78. DBOD.No.Sch.BC.68/C.96(S)-68 12.01.68 Unsecured Advan....